Electronic Commerce and Retailing

Retailing is expected to change with the rapid development of new online sales and distribution channels that literally can be used from anywhere, anytime-from work, school, a hotel, car, or airplane. These developments should impact retailing as much as the advent of strip malls, catalogue retailing, and TV-based home shopping. Almost every retailer is re-evaluating every aspect of its operation from customer service to advertising, merchandising to store design, and logistics to order fulfilment. Furthermore, reacting to the pressure of retailers, suppliers are assessing technology based solutions to drive down costs (labour, delivery, and production) and become more efficient producers of goods.

Online channels such as online services and the Web are also impacting traditional retail business models. In the traditional model, the customer went to the store and located the product. In the online model, the retailer seeks out the customer. The success of catalog retailers demonstrates that a significant portion of consumers have embraced the reverse model: the retailer going to the consumer.

However, retailers need to consider the following issues in developing a business model:

Product/Content Issues: What kind of products are suited for online retailing?

Software Interface Issues: What kind of features will constitute an effective interface? What features make it easy to find and select items for on-line purchase?

Process Issues: What are the specific steps in the shopping process from a consumer’s perspective? What kind of processes should companies de-velop to fulfill orders efficiently?

Before examining the implications of changing consumer behavior and online retailing in the existing retail business, let us step back for a moment and ask the question: Why should retailers consider the online environment as a way of doing business? The answer lies in understanding the market changes that affect retailing and that will continue to affect it in the future.


E-retailing essentially consists of the sale of goods and services. Sometimes we refer to this as the sale of tangible and intangible goods, We can divide tangible goods into two categories: physical goods and digital goods.

Examples of physical goods would be a book, a television set, a video recorder, a washing machine, etc.

Examples of digital goods are software and music, which may be downloaded from the internet. The sale of intangible goods is sometimes called E-servicing.

Examples of services that may be sold are information such as the most recent stock prices, the most recent foreign exchange rate, or education.

Entertainment such as -games that would be played on the internet are also examples of e-services. So are the sales of services such as telecommunication services or banking services. The sale of tangible and intangible goods are all referred to as Customer oriented e-commerce or eretailing, if they are sold directly to the consumer who is the end user. Here we discuss the sale of tangible goods.


Difference between Traditional retailing and E-retailing

Traditional retailing

Traditional retailing essentially involves selling to a final customer through a Physical outlet or through direct physical communication. This normally involves a fairly extensive chain starting from a manufacturer to a wholesaler and then to the retailer who through a physical outlet has direct contact with the final customer.

Examples of physical outlets that retailers currently use are: Malls

  • generalized stores (e.g. department store)
  • specialized stores
  • franchise stores

t is useful to reflect that even in traditional retailing we have moved away from just using a static physical outlet within which a customer can have direct contact with the retailer. Thus, more recent forms of traditional retailing include

  • direct mailing
  • telemarketing
  • door-to-door sales
  • vending machines

Direct mailing to a customer normally involves sending a brochure or catalogue to a customer. The customer browses through this catalogue and then carries out mail ordering. In some respects, this notion of browsing through a catalogue is a forerunner of e-retailing. Direct mailing, telemarketing, door-to-door sales, or the use of vending machines includes other forms that have actually moved away from a physical fixed outlet and in a way are intermediate forms of the movement away from traditional physical retailing outlet to the virtual retailing we see on the internet.


The internet has allowed a new kind of specialization to emerge. Instead of specializing just in a special product line, they allow specialization in particular classes of customers and sellers. Thus, we see, which allows last minute purchases of travel tickets, gift, and entertainment to be matched against last minute sellers of the same items. Here, we see specialization not in a product line but in a class of purchasers and a class of sellers. This kind of specialization would not have been possible before we had the internet.

In addition to these specialized stores, we also get generalized e-stores where a store sells several product lines under a single management. Examples of these generalized stores include JC penny and Walmart.

We also have the electronic counterpart of malls or e-malls. E-malls essentially provide a web-hosting service for your individual store much in the way that mall provide a hosting service in the sense of a physical location for your store.

Examples of these e-malls are Yahoo! Store, GEO Shops, and CNET stores:

Benefits of E-RetailingTo the customer

Customers enjoy a number of benefits from e-retailing.

The first of these is convenience. It is convenient for the customer as he does not have to move from shop to shop physically in order to examine goods. He is able to sit in front of a terminal and search the net and examine the information on goods. The second aspect of convenience he gets is in terms of time. Normally, the traditional shop has an opening time and a closing time and the customer can only visit the shop within these periods. On the net, the customer can choose at any time to visit a site to examine the goods that are available and actually carry out his purchasing at one’s own convenient time. The third type of convenience that the customer gets is that he has access to a search engine, which will actually locate the products that he describes’ and also the site where they may be available, or perhaps even locate the sites where they may be available at the best price

The second type of benefit to customers is better information. The Internet and the World Wide web are essentially communication media that allow retailers to put on quite extensive information related to their products, which is available to the customers.

The third type of benefit that the customer gets is competitive pricing. This is due to two factors.

  • The first is lowered costs to the retailer because he does not have to maintain a physical showroom, he does not have to hire several shop assistants, and these savings can be passed on to customers in the form of reduced prices.
  • Secondly, competitive pricing pressure that arises from the fact that the customer is now able to look at prices at several sites. Therefore, the pressure is always there on the retailer to maintain a competitive price for his products.

To the business

There are a number of benefits of e-retailing to the business itself.

  • The first of these is global reach. The retailer now is no longer restricted tocustomers who are able to reach the store physically. They can be from anywhere around the globe. The retailer must, of course, deliver the goods of a purchase to the customer.
  • The second benefit is better customer service. The use of email and the use of electronic interchange of messages between the customer and the retailer allow better communication between the customer and the retailer. These allow one to easily inquiries and deal with complaints. These also allow a much more rapid response time than was possible in the days of faxes andpostal mail.
  • The third benefit is the lowered capital cost to the retailer. The retailer does not have to maintain showrooms; he can probably have lower inventories.Thus, while lists over a few million titles, it keeps an inventory of a few thousand best selling titles only. Therefore, the retailer has lower warehousing costs. He does not have to have many shop assistants who are physically answering questions and. Showing the customer goods.
  • The fourth benefit to the retailer is mass customization. Based on requests by the customers, the retailer is now able to carry out mass customization with reduced time to market for the customized products.
  • The next advantage is targeted marketing. The retailer is now able to pick on a specific targeted group of customers and direct marketing towards these customers. The retailer is also able to provide more value-added services in the way of better information, add-on services to basic services, or add-on options to products that he is selling.
  • The last advantage to the retailer consists of different new forms ofspecialized stores that he is now able to utilize.

Models of E-Retailing

There are several models for e-retailing and these include

  • Specialized e-store
  • Generalized e-store
  • E-mall
  • Direct selling by the manufacturer
  • Supplementary distribution channel
  • E-broker
  • E-services

Specialized e-stores

The first class of model what we mention in e-retailing was the specialized e-store and here you can distinguish between two different kinds of specialization: the more traditional specialization along product lines and specialization by function. When you have specialization by product line, essentially you have a store that decides to pick one particular product line, say books, flowers, CDs, clothes, and sells only this particular product line. It may also choose to position itself in a particular part of the product line, e.g. clothes; it could choose to position itself at the very expensive end of the market selling brand names _ Gucci and Armani.

Alternatively it could do more mass marketing by selling non – brand names at a much lower price, or it could go into discount selling. So, you can have a specialization by product line, and then you could have specialization - positioning within that product line to cater for a particular part of the marker.

In contrast to this, a new kind of specialization is emerging on the internet, as mentioned. earlier, namely specialization by function. A good example of this is In they sell gifts, travel tickets, and other items for last minute shoppers who want to purchase these items at a very short notice. Generally, when one purchases an item at a very short notice (e.g. travel), he often pays a premium, which is an extra amount for the convenience of booking the travel at the last minute. Now, this means that the air ticket is likely to cost much more than if he had purchased it some time before traveling and made use of different discounts or promotions.

The producers of the web site realized that there are groups of customers who make these purchases at the last minute and feel some degree of angst at having to pay the premium for doing this shopping at the last minute. On the other hand, you will find that you may have sellers, e.g. airline companies, that have empty seats at the last minute which they are unable to fill. So, what does is bring together travelers who want to book at the last minute and an airline which has got spare capacity at the last minute, and allow the former to buy from the latter at the last minute. In this situation, the purchaser may get his airline ticket at a reduced price.

So, there is a win-win situation for both the purchaser and the seller. This is a unique kind of specialization. It is very difficult to do this unless one utilizes the internet to carry out this kind of specialization.

Generalized e-stores

The next category of e-retailing models that we intend to look at is generalized e-stores. Generalized e-stores sell a large number of product lines rather than con-fining themselves to just one or a very few product lines.


The next e-retailing model we consider is the e-mall. In an e-mall, cyberspace is rented out to cyber e-stores that wish to sell their goods. This store could be a specialized or generalized e-store. So, several product lines can be present. in a single e-mall. However, unlike the generalized e-store which is under a single unified management, in an e-mall, each store is under its own management. E-mall management is responsible only for creating the cyber sites that can be rented and can support services and marketing of the mall. It, thus, provides a web hosting service.

Several e-malls also provide software tools, which can be utilized by a prospective e-store to create and maintain it_ e-store. The advantage for an e-store is that it is grouped together with other stores in a wellknown e-mall site and, therefore, is likely to pick up visitors to the mall.

Direct selling by the manufacturer

A number of manufacturers with well-known brand name products have chosen to use the internet to carry out direct selling via the internet. One. of the best known here is Ford, which utilizes the internet to achieve direct selling but uses its dealer network to facilitate distribution and delivery. The other well -known examples are Cisco systems and Dell computers. Note that this approach permits mass customization to meet customer preferences. This direct selling by the manufacturer has an important disintermediation effect leading to reduced costs to the end customer and increased profitability to the manufacturer.

A note of caution is important here. By and large, this approach can be used by manufacturers of well-known brands of products because the customer already knows the pro-duct. Secondly, the manufacturer must have a thorough understanding of customer preferences, otherwise he has to rely on the customer knowledge of a retailer.

Brokers or intermediaries

This class of e-retailers is essentially an extension of the notion of a broker from the physical to the cyber world. A broker is an intermediary who

  • may take an order from a customer and pass it on to a supplier
  • may put a customer with specific requirements in touch with a supplier who can meet those requirements
  • may provide a service to a customer, such as a comparison between goods,with respect to particular criteria such as price, quality, etc.

Thus, brokers provide comparison shopping, order taking and fulfilment, and services to a customer. That is the reason why they are sometimes referred to as electronic intermediaries.

There are several different models for electronic brokers and these include:

  • Brokers that provide a registration service with directory, search facilities,e-payment facilities, and security-related facilities. Any business can register with such an e-broker.
  • Brokers that meet a certain requirement such as a fixed price.
  • Brokers that provide comparison shopping between products.The last model i.e. E-services is discussed in the next lecture.

Features of E-Retailing

  1. The provision of an on-line catalogue, which allows one to browse through different categories of goods. Thus, it is dynamic and linked with order process.
  2. The provision of a search engine, which is a very important feature that does not exist in traditional retailing.
  3. The provision of a shopping cart, which allows convenient goods selection. An ability to provide an automatic price update.
  4. Personalization of store layouts, promotions, deals, and marketing.
  5. The ability to distribute digital goods directly. Thus, these goods can be downloaded instantly.
  6. An on-line customer salesperson, “who” can help customers to navigate through the site.
  7. An order status checking facility, which is a useful feature before submission.
  8. The use of Forums (collaborative purchasing circles) to create a customer community and thus increase “stickiness.”

Changing Retail Industry Dynamics

Important factors that affects the retailing industry dynamics are:

  • Overbuilding and excess supply.
  • Change in consumer demographics, which more premium placed on efficientuse of time
  • Changes in consumer behavior, with less focus on brand name and more on lowest prices.
  • Technology improvements that provide greater convenience and more information than traditional retailing.

Overbuilding and Excess Capacity

With online retailing, constraints of time and space disappear. There is no bricks and mortar storefront to worry about, no critical locations. This new way of retailing can severely affect companies that have invested in expansion and adding capacity. It is important to understand the trouble traditional retailers will face if online retailing takes off.

The 1980s was a period of overexpansion and turmoil for retailers. By the end of the decade, complaints about excessive retail space were being voiced. Profits were declining and control of operating expenses became a paramount management objective. Retailers reduced staff and minimized merchandising in order to enhance profits. Sales growth and market share development were given second priority behind profit enhancement.

In the 1990s, companies are under pressure to grow and produce profit. An important measurement of profit gains is gross margin per square foot. For many retailers, these numbers is either growing slowly or declining, partially reflecting a less favorable product mix and more competition. Inadequate productivity, both per worker and per unit of space, is also reducing profit margins. Overbuilding also resulted in a growing shortage of lowcost, entry-level workers for the retail industry. The shortage of entry -level workers means that retailers are using under trained workers who are less able to empathize with shopper needs-leading to a perception that retailers in general and shopping centres in particular are unable or unwilling to provide quality service.

Clearly, with crowded domestic markets and competition constantly grinding away at operating profit, new ways of retailing are being explored by forward-thinking companies such as Wal-Mart.

Demographic Changes

Shopping patterns are beginning to change with the increase of time -strapped, two-career couples and the aging of America. Value and time management are the consumer concerns driving interest in online retailing. Recent retail data shows a decline in the amount of time Americans are spending in shopping malls [EDR95]. The suggested reasons vary: time constraints, safety concerns, and growing frustration with the lack of courteous service and insufficient product information. Understanding the implications of time constraints on consumer shopping behavior is important as they portend the trends to come. For instance, Americans have openly embraced shopping channels like QVC and Home Shopping Network and retailers like CUC International.

Today’s time-strapped shoppers have less time and want better values, fewer hassles, and more options. Today, a shopping trip requires a consumer to decide what he or she or the family needs, brave the traffic on the way to a store, hunt for parking, find and select items for purchase, take them to a checkout, wait in line, pay for the items, sometimes bag them, and carry them back home. It can be a hassle and a lot of work, so most working professionals have learned to dread shopping trips. As technology improves, it may not be long before driving to the store gives way to online shopping with home delivery as provided by Peapod.

In contrast, there is a growing segment of the population for whom time constraints are less of a problem. The demographic outlook in the United States is for an increasing share of older shoppers (age 50 and above) who prefer shopping at stores rather than online. However, the product mix offered by many department stores and malls is increasingly out of touch with the aging population and does not reflect the shift in purchasing power.

Also, with the aging of the population, there is evidence to indicate a shift in consumer interest away from material goods and toward experiences, such as travel and recreation. In addition, as people get older, they tend to become more frugal. Retailers will need to concentrate on value by offering new product mixes. By this we mean a product mix that includes not only merchandise but also bundles in entertainment and “recreational” shopping with movie theatres, restaurants, bookstores, libraries, and community meeting facilities.

This sort of change is already occurring in bookstore design (such as Borders Bookstores and Barnes and Noble), which include a variety of facilities such as coffee shops. However, building shopping malls based on these new business models is a risky venture and requires huge investments.

Consumer Behavior

Consumer behavior is more volatile than ever before, and companies need new ways of responding to consumer needs and satisfying demand. According to one survey, the typical consumer spent only four hours a month in a shopping mall in 1990 versus ten hours in 1985, and sales per square foot dropped. Specialty retailing-power centres, discount malls, discount stores, and catalogue shopping-has become one solution for closely monitoring consumer trends and reacting to them quickly. All of these alter-natives have one thing in common: they provide consumers with a very large selection of producers priced with deep discounts.

Consumers are no longer as influenced by brand names as they used to be. The emergence of the value shopper is changing retailing. Today, the shopper is less willing to pay the premium for the brand name and much more attentive to quality and value. The decline in gross margins is the first evidence of the impact of that change, reflecting lower initial mark-ups and more discriminating shoppers in that segment clearly, retailers that are focused on providing value-the best price, service, and selection-regardless of the brand name will be successful.

The real differentiating characteristic for retailers will be in their ability to define what the broad or niche consumer segment is looking for, identifying characteristics of customers in each target segment, and learning how to bundle products and package brands so that they become the preferred choice for online customers

Technology Improvements in Electronic Retailing

Today, electronic retailing is still far from being a competitive threat to more traditional store retailing (see Table), but it is becoming increasingly attractive as technology and applications improve, and retailers gain experience.

Technology Improvements in Electronic Retailing

Three dominant forms of electronic retailing channels are: television re-tailing, CDROM retailing, and online service based retailing, in which we include Web-based retailing. Now we can discuss about the most prominent one: the television retailing.

Television Retailing:

Television retailing grossed an estimated Rs. 3.2 billion in 1994. One of the pioneers in this area is Home Shopping Network, Inc. (HSN), which began broadcasting electronic retailing to a small, local audience in 1982. Three years later they took this still unproven idea national- and made it work. Today, HSN is a television-based retail, entertainment company, and online retailer (owns Internet Shopping Network), with coast-to-coast customers and annual sales of $1 + billion.

The breadth and reach of TV retailing are amazing. In. 1994, HSN reached 65.8 million television households throughout the United States. These households received the signals via cable, broadcast, and satellite dish, twenty-four hours a day, seven days a week. Unlike online audiences, which tend to be predominantly affluent and well educated (net annual in-come is estimated at Rs. 60,000 - Rs. 80,000), the target audience for television re-tailing is moderate income households and mostly women. How does it work? The TV retail marketing and programming are divided into segments that are televised live, with a show host who presents the merchandise and conveys information relating to the product, including price, quality, features, and benefits. Show hosts engage callers in on-air discussions regarding the currently featured product or the caller’s previous experience with the company’s products. Viewers place orders for products by calling a toll-free telephone number.

Generally, merchandise is delivered to customers within seven to ten business days of placing an order. The purchased item may be returned within thirty days for a full refund of the purchase price, including the original shipping and handling charges.

The success of television shopping is the result of the effective utilization of electronic media for capturing the power and influence of celebrity and the magic of showmanship, and bringing them to bear on a sale. In its annual report, the Home Shopping Network states that a celebrity can de-but a line of jewelry on HSN and sell more than Rs. 2 million in a single weekend. Of course, there’s another advantage to television retailing.

When customer interest, which is monitored by the number of calls being received, begins to wane, the retailer knows it instantly and can simply move on to the next product. More recently, infomercials have become a crucial retailing topic. The infomercial has become a new and interesting way to retail specialty products. Modem filming techniques and ingenuity make it possible to create high-quality, cost-efficient, and entertaining documentaries that sell. This Coincides with the television viewing public’s appetite for information.

Infomercials are an especially logical medium since retailers have the opportunity to economically test and evaluate a product through mass channels such as television retailing before committing major capital resources to infomercial production.

Management Challenges in Online Retailing

While changes in retailing may be driven by technology, managerial vision is required for successful implementation. Traditionally, retailing has been a low-tech environment in which retailing executives often relegated technology issues to back-room operators. These managers are most at risk, as they do not have a clue that a major revolution has begun. Most of them have never used a computer (or had to), never been on an online service, and do not know what the Internet is or what it can do. The winners will be the players who understand how to leverage the unique capabilities of the on-line medium to effectively meet the changing needs of the consumer.

While the technology required to implement online retailing is maturing, many management issues remain unanswered. No one really knows yet how to build and run a successful, mass market online mall. The sales Medium is new, the technology is new, and retailers have a lot to learn about tricky technology, customer behavior, and management issue. But one thing is clear: For online retailing to succeed, online technology must complement management and operational strategy.

Online Retailing Success Stories

Peapod, CUC International, and Virtual Vineyards help to explain the intricacies of online retailing.

Online Retailing: Peapod’s Experience

Peapod, based in Evanston, Illinois, is using the online medium for food retailing services. Founded in 1989 by two brothers, Peapod is a member of an online grocery / drug-store shopping and delivery service that already has thousands of customers in the Chicago, San Francisco, and Boston areas. Peapod was founded on the idea that people do not want to go to the grocery store. Peapod has an online database of over 25,000 grocery and drugstore items, and allows comparison shopping based on price, nutritional content, fat, or calories.

Other features include electronic coupons, retailer preferred customer discounts, and other benefits like recipes, tips, and information. Peapod membership also allows users to use the shopping and home delivery service. Peapod has a staff of professional shoppers, produce specialists, and delivery people who fulfil the order.

How Does It Work?

Peapod provides customers with home shopping ser-vices via Pc. Customers need to buy a software application that enables them to access Peapod’s database through an online computer service. Peapod initially had a DOS-based system with graphics. They introduced a new version of the software in 1995-a Windows platform in which product pictures are available. Using the PC, a consumer can access all of the items in a grocery store and drug store. Peapod customers create their own grocery aisles in their own virtual store. Customers can request a list of items by category (cereals), by item (Frosted Flakes), by brand (Kellogg’s), or even by what is on sale in the store on a given day. Within categories, they can choose to have the items arranged alphabetically by brand or sorted by lowest cost per ounce, package size, unit price, or nutritional value.

Customers also can cre-ate repeated use shopping lists (baby items, barbecue needs, and the like). Peapod’s back office is linked with the mainframe databases of the super-markets at which it shops for its customers (Jewel in Chicago and Safeway in San Francisco), allowing it to provide the supermarkets’ stock keeping units and shelf prices electronically to its customers. Once consumers have made a selection, they can then give specific shopping instructions, such as “substitute with same calories,” or red grapes only.” They can click on the “Comment” button and type in any extra information they would like the Peapod shopper to know. At any time during the order, a consumer can subtotal the amount purchased, or access the “Help” screen for immediate assistance.

Online ordering is simple: users double-click on the Peapod icon and then enter their user IDs and passwords. On verification, users get access to a whole grocery store and drug store of items. Before the actual purchase of an item, users can view images of it and the nutritional content as well. The system allows users to sort items by various criteria like price, price/ unit, total calories, fat, protein, carbohydrates, and cholesterol. With these features, Pea pod aims to target the health and fitness conscious consumer who chooses foods tailored to specific dietary needs.

There are also search features to help locate a particular item. A “Find Item” option at the top of the screen lets users search either by brand name or product type. When users have finished shopping, they click on “Done” and the order is electronically routed to Peapod. During the transaction closing process, users need to choose a delivery time within a 90- minute slot. Pinpoint delivery within a 3Dminute window) can be selected for a small additional charge. Payment can be made by check, charge, or Peapod Electronic Payment. Eighty-five to ninety percent of Peapod’s orders come in via computer; the rest are faxed or phoned. Peapod orders are taken centrally, and then faxed to the stores.

The store gets a printout with the order, the delivery ad-dress, and instructions for getting there. Each order is filled by a Peapod employee, who shops the aisles of the store. The employee pays for the groceries, often at special Peapod counters in the back of the store. The order is then taken to a holding area in the supermarket, where the appropriate items are kept cold or frozen until the deliverer picks up a set of orders and takes them to the customers within their 90-minute pre-selected windows. At each stage-ordering, shopping, holding, and delivery-the processes are tailored to provide personalized service at a relatively low cost.

If a customer has a problem, he or she can call Membership Services, and a service representative will try to resolve the matter. Peapod treats each call as an opportunity to learn (and remember) each customer’s preferences and to figure out what the company can do to improve service as a whole. For example, service representatives found that some customers were receiving five bags of grapefruits when they really wanted only five grapefruits. In response, Peapod began asking customers to confirm orders in which orderentry errors may occur.

Peapod members are charged actual shelf prices, plus a monthly service fee, a per-order charge of Rs. 5.00 plus 5 percent of the order amount. Customers are willing to pay these extra charges for convenience and because Peapod provides a lower cost shopping experience for the consumer. Consumers save money-despite the extra overhead-because they use more coupons, do better comparison shopping, and buy fewer impulse items than they would if they shopped at a real supermarket.

Reducing impulse purchases is important when you consider that 80 percent of the items purchased in a grocery store are impulse items-non-planned purchases. In addition, consumers save time and have more control because they can shop from home or work whenever they want.

What is the Business Model?

Rather than automating the trip to a retail store, as other online providers are doing, Peapod is using interactive technology to change the shopping experience altogether.

Indeed, the formula for Peapod’s success is the busy American lifestyle. The homes it delivers to cut across many demographics.The one thing these demographics have in common is they have better things to do than grocery shop. Still, if it were not for wellmanaged logistics, these customers would be back in the stores in a second. The behindthe- scenes logistics are central to what Peapod is all about; Peapod has to make sure the orders get to the stores and that they are shopped correctly.

How does Peapod Compete with Traditional Retailers?

Traditional retailers make money from the suppliers. They provide access to customers and make their money by buying on deals, volume discounts, and getting coop advertising. Peapod makes all of its money on the customers it serves, it is a mass customizer. It creates the supply chain after identifying a specific demand from a specific customer, and it feeds off the existing infrastructure to do it. However, existing retailers do have some advantages.

An important, though subtle, advantage enjoyed by food retailers is the shopper’s resistance to switching food stores because of familiarity with the shelf locations of products purchased. It is also inconvenient for consumers to relearn dozens of product locations at a new store. The online environment must offer significant advantages to overcome shopper inertia and induce trial, let alone continued, patronage. Is Peapod a competitor to the retail grocer? Not really. Peapod’s strategy has been to partner with the retailer rather than compete directly.

A lot of credibility comes with the name of the retailer in its individual market. Peapod can help grocers expand into places that might not otherwise be practical from a capital investment standpoint. However, it is quite possible that in the future Peapod may be tempted to compete with grocers by emulating certain aspects of their warehousing. Why? As these new retail formats emerge , and once Peapod gains enough customers, Peapod will be tempted to say it is costing a lot to go to the store and pick up product off the shelf. To avoid the overhead , Peapod could have its own warehouse. As soon as the Peapod does that it is likely to fall into the same traps as the retailers, such as having an overflow warehouse when something is available on a deal or buying products before there is actual need.

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